Desjardins: an attractive risk/rewardUpside vs downside—scenario analysis shows attractive risk/reward
The Desjardins Takeaway
With BBD shares down 20.1% since the company reported 2Q results (vs the S&P/TSX at +0.5%), we have received several calls in relation to the turnaround story, bizjet market dynamics and an entry point that would be considered attractive. Ultimately, even when using bearish assumptions, our downside scenario is not far off from where the stock is trading currently, signalling that risk/reward characteristics for BBD are skewed favourably, creating a buying opportunity in our view.
Highlights
Investor misunderstanding of seasonality in deliveries and concerns surrounding new bookings are the main pushbacks. BBD indicated that investors should expect most of its 2H deliveries (approximately two-thirds) in 4Q, which is not outside the norm when considering the historical seasonality of BBD’s bizjet deliveries.
Upside scenario of C$133/share—possible, if bookings are stronger than expected and deleveraging drives multiple expansion. In this scenario, we assume BBD will book some chunky orders, slightly increase production and keep its book-to-bill >1x through 2024. For BBD to achieve this in 2023, it must book a minimum of 100 orders in 2H, which would likely have to include a large fleet operator order. We calculate that leverage would fall to 1.3x, likely driving an investment-grade credit rating—the faster improvement in leverage would likely command a bump in valuation.
Downside scenario of C$45/share, signalling the market is currently pricing in the worst—despite lower bookings, deliveries and FCF, BBD would still achieve its leverage target. In this scenario, we assume bookings will fall to 0.8x in 2H and continue to be pressured in 2024, forcing BBD to cut production. We calculate that BBD ending this year with a depressed booking level would lead to FCF of -US$1m in 2023 amid lower cash inflows from orders, and US$163m in 2024 assuming slightly lower deliveries and depressed margins from diseconomies of scale. Despite this, we calculate that BBD would end 2025 at leverage of 2.5x, still within the investor day target of 2.02.5x.
Valuation Maintaining our C$99 target.
Our target is based on an EV/EBITDA multiple of 8x on our 2024 EBITDA forecast of US$1,340m. We use an exchange rate of C$1.34/US$1.
Recommendation
Reiterating our bullish stance. We remain confident in management’s ability to meet (and potentially exceed) its 2025 targets.